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A wavelet-based panel unit-root test in the presence of an unknown structural break and cross-sectional dependency, with an application of purchasing power parity theory in developing countries

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  • A. Almasri
  • K. Månsson
  • P. Sjölander
  • G. Shukur

Abstract

This article introduces two different non-parametric wavelet-based panel unit-root tests in the presence of unknown structural breaks and cross-sectional dependencies in the data. These tests are compared with a previously suggested non-parametric wavelet test, the parameteric Im-Pesaran and Shin (IPS) test and a Wald type of test. The results from the Monte Carlo simulations clearly show that the new wavelet-ratio tests are superior to the traditional tests both in terms of size and power in panel unit-root tests because of its robustness to cross-section dependency and structural breaks. Based on an empirical Central American panel application, we can, in contrast to previous research (where bias due to structural breaks is simply disregarded), find strong, clear-cut support for purchasing power parity (PPP) in this developing region.

Suggested Citation

  • A. Almasri & K. Månsson & P. Sjölander & G. Shukur, 2017. "A wavelet-based panel unit-root test in the presence of an unknown structural break and cross-sectional dependency, with an application of purchasing power parity theory in developing countries," Applied Economics, Taylor & Francis Journals, vol. 49(21), pages 2096-2105, May.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:21:p:2096-2105
    DOI: 10.1080/00036846.2016.1231908
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    Cited by:

    1. Muhammad Zakaria & Seemab Tanveer & Bashir Ahmad Fida & Muhammad Iftikhar ul Husnain, 2023. "Inflation Differential Pass-Through to Exchange Rate: Some Evidence From Pakistan," SAGE Open, , vol. 13(4), pages 21582440231, December.

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